COVID-19: EU ISSUES TEMPORARY BUSINESS COOPERATION FRAMEWORK AND FIRST ‘COMFORT LETTER’ IN ALMOST 20 YEARS

United Kingdom

04/13/2020

Morgan Lewis

Whilst the EU Commission’s (EC’s) temporary business cooperation framework (Temporary Framework) offers some welcome guidance, the EC underscores that it will not tolerate coordination between businesses that seek to exploit the crisis as a cover for anticompetitive collusion or unilateral conduct by a business with significant market power that seeks to exploit the crisis.

BACKGROUND

The EC’s Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak was published on April 8. It follows the European Competition Network’s (ECN’s) joint statement on March 23 that , as COVID-19 may trigger the need for companies to cooperate to ensure the supply and fair distribution of essential scarce products to all consumers, the ECN will not intervene against “necessary and temporary measures.”[1]

Article 101 of the Treaty on the Functioning of the European Union (TFEU), and the equivalent national provisions of the UK and EU member states, prohibits arrangements between businesses that have as their object or effect the restriction, distortion, or prevention of competition between EU member states, unless they can be shown to give rise to benefits to consumers which outweigh any restrictions of competition. Such anticompetitive arrangements can arise directly or indirectly between competitors, and/or between companies at different levels of the supply chain, such as between a supplier and its customers. Companies found to have breached Article 101 are liable for fines of up to 10% of worldwide group turnover.[2]

Article 102 of the TFEU (and equivalent national provisions) prohibits unilateral conduct by a business with significant market power that may affect trade. In general terms, a business may be considered to have such market dominance if it has a market share of ca. 40% or more. Abusive conduct may include refusals to supply; pricing with exclusionary effects; conclusion of exclusive purchasing; supply or distribution arrangements creating a barrier to market entry; or making the supply of a product conditional on the purchase of another product in addition. Companies found to have infringed Article 102 are also liable to fines of up to 10% of worldwide group turnover.

Undertakings that have suffered loss as a result of a breach of Article 101 and/or Article 102 may invoke private litigation in the courts to recover their loss.

The Temporary Framework shows signs of previous EC flexibility in accommodating unusual economic problems, as with the so-called “crisis cartels” in the 1980s. Even though it did not show this kind of flexibility in the 2008 financial crisis, it is ready to do so now with regard to COVID-19.

THE EC’S TEMPORARYFRAMEWORK

The Temporary Framework describes COVID-19 as giving rise to exceptional challenges including the disruption of supply chains, as businesses struggle to respond to “asymmetric demand shocks” caused by either an abrupt decline in consumer demand for certain products and services or a steep rise in demand for other products and services. Particular note is made of the demand shocks that are being experienced in the health sector (including pharmaceutical companies, medical equipment producers, and their distributors).[3]

Whilst the Temporary Framework refers to shortages of “essential products and services”, the EC recognises in its accompanying press release that supply emergencies can also arise in relation to essential goods and services outside the health sector. Accordingly, the application of the Temporary Framework could be applicable to other sectors, for example, food retail and some consumer goods.

The EC recognises that the exceptional circumstances posed by COVID-19 may give rise to a need for businesses to cooperate to mitigate the effects of the crisis for the benefit of citizens. In this regard, bridging the gap between demand and supply may require a rapid and very significant increase in the production of certain medicines (or other products), that may in turn result in a reduction in the production of other non-essential or non-shortage products, or indeed the reallocation of stocks.

To address this, businesses may need to exchange/communicate information on sales and stocks and on their intentions as to production. Similarly, businesses may need to discuss and agree on output being increased more efficiently if only one medicine is produced at a particular site, instead of businesses switching their production between different products. The EC advises in the Temporary Framework that this kind of cooperation may not be an antitrust violation.

The Temporary Framework is effective from April 8, 2020, and it will remain applicable until the EC withdraws it. The EC says that it may amend or supplement the Temporary Framework, depending on the evolution of the COVID-19 crisis.

BUSINESSCOOPERATIONADDRESSINGESSENTIALPRODUCTANDSERVICESHORTAGES

The EC notes that the response to emergency situations related to COVID-19 may require different degrees of cooperation, giving rise to a varying scale of potential antitrust concerns.

For instance, cooperation in the health sector may be limited to entrusting a trade association (or other third party, such as an independent advisor, an independent service provider, or a public body) to do the following:

Coordinate the joint transport for input materials
Contribute to identifying essential medicines in relation to which there are forecasted risks of shortages
Aggregate production and capacity information, without exchanging individual company information
Work on a model to predict demand on a member state level, and identify supply gaps, or share aggregate supply gap information
Request participating companies, on an individual basis and without sharing that information with competitors, to indicate whether they can fill the supply gap to meet demand (either through existing stocks or by increasing production)
The EC says that such activities would not ordinarily raise antitrust concerns, provided that they are subject to sufficient safeguards, for example, to prevent companies sharing commercially confidential information.

However, the EC also recognises that cooperation to overcome critical supply shortages in the health sector as a result of COVID-19 may need to go further. In this regard, it says that measures aimed at (1) adapting production, (2) stock management, and (3) distribution and surety of supply may require the exchange of commercially sensitive information, and for businesses to coordinate on the reorganization of their production, including deciding between them who will manufacture what and at which site.

The EC explains that whilst in the ordinary course, such conduct would be problematic under the competition rules, in the current exceptional circumstances, such measures would not be treated as such. However, this would be the case only to the extent that such measures are

designed and objectively necessary to increase output in the most efficient way to address or avoid a shortage of essential products or services, such as those that are used to treat COVID-19 patients;
temporary in nature (i.e., to be applied only as long as there is a risk of shortage or during the COVID-19 outbreak);
not exceeding what is strictly necessary to achieve the objective of addressing or avoiding the shortage of supply; and
responsive to a request from public authorities to businesses to temporarily cooperate.
The EC adds that cooperation in the context of an “imperative” request from public authorities to temporarily cooperate in relation to urgent COVID-19-related situations is allowed, while cooperation encouraged and/or coordinated by a public authority will be considered a “relevant factor” to be taken into account to conclude that such cooperation would not be problematic or an enforcement priority.[4]

The EC advises businesses to document all exchanges and agreements between them in order that they are in a position to make them available to the EC upon request.

“COMFORT LETTERS”

Prior to 2003, businesses could notify a cooperation agreement to the EC with a view to receiving an individual exemption from the application of Article 101, provided certain conditions were satisfied, by way of a written “comfort letter”.

Since 2003, this has not been possible, save in exceptional circumstances. Instead, businesses have been responsible for self-assessing the legality and compatibility of their agreements and practices under Article 101. However, as pressure for more guidance under Article 101 has become increasingly persistent recently, in March 2020, the EC indicated that it would be willing to give guidance on certain types of cooperation agreements.

In its Temporary Framework, the EC states that it will continue to provide oral guidance to firms and trade associations on specific cooperation initiatives.[5] However, exceptionally and at its own discretion, it now says that it will also provide written guidance by means of ad hoc comfort letters with a view to increasing legal certainty in order to address the shortage of essential products or services during COVID-19.

FIRSTCOMFORTLETTER IN NEARLY 20 YEARSISSUED TO MEDICINESFOREUROPE

In its press release , the EC states that it exceptionally issued the first such comfort letter to the generic pharmaceuticals association, Medicines for Europe (MFE) on April 8, 2020 relating to a specific cooperation project aimed at ensuring surety of supply of critical hospital medicines.[6]

The EC recognizes that generic pharmaceutical companies produce the largest part of the critical hospital medicines now urgently needed in large volumes to avoid shortages. The cooperation project addressed by the comfort letter is open both to members and non-members of the MFE association, while in its own press release MFE invited companies with a marketing approval/licence for the relevant medicines to participate in the project.

The first EU comfort letter in nearly 20 years offers an indication of what other industries may expect if they make similar requests for temporary exemption from competition law rules in the COVID-19 situation. We understand that MFE set out a project to develop a list of products in coordination with the European Medicines Agency (EMA), and the EC, including its health department, while the EU antitrust authority responded swiftly to the sector’s needs, granting the comfort letter within two days of formal notification. We also understand that the comfort letter allows pharmaceutical companies to share inputs in the form of active pharmaceutical ingredients (APIs) and “intermediates,” that is, semi-finished versions of a medicine.

The letter also recognises that companies may need to communicate to decide whether they should switch production of a medicine to a different site, to increase capacity and avoid under-production, and they may coordinate distribution. In line with the Temporary Framework, there is a requirement for minutes of all meetings to be kept and copies to be shared with the EC, while indispensable business information will be collected by a third party, and may be shared with individual companies in aggregate form only. Any discussion on price, or issues that are not strictly necessary to meet the objectives of the project, will meet strict antitrust enforcement.

BREACHES OF COMPETITIONLAW ON THEBACK OF THECRISISWILLNOT BE TOLERATED

The EC has made it plain that it will not tolerate businesses taking advantage of the current situation by using it for example as a “cover” for anti-competitive collusion or for abusive conduct, for example, by charging prices above normal competitive levels, or by limiting production or obstructing attempts to scale up production resulting in shortages of supply. This is regardless of whether a dominant position has been conferred by the circumstance of the crisis.

Whilst the EC intends the Temporary Framework to provide some clarity and comfort on the way that it proposes to apply competition law in the health sector, or indeed in other sectors not identified in its guidance, during the COVID-19 pandemic, businesses are likely to have many questions as regards the types of information exchanges between them that would be tolerated, the nature and extent of any cooperation they may engage in with one another, and how these should be documented, as well as on their own individual pricing policies.

GUIDANCE IS NOTBINDING

Moreover, as the EC points out, its Temporary Framework and any comfort letters that it may issue are just guidance. Even though the UK’s or EU member states’ national competition authorities would not in the ordinary course bring proceedings for a potential competition law breach addressed in EC guidance or a comfort letter, these are not legally binding. Parties should also be mindful that they must provide correct and complete information to the EC on the facts and their proposed cooperation, otherwise that will undermine the protection offered by the comfort letter. Moreover, if the facts and circumstances change materially following the issuance of a comfort letter, the EC may revisit the matter.

The Temporary Framework as well as any comfort letters do not offer protection against private litigants invoking Article 101 and/or Article 102 (or indeed equivalent national provisions) to issue an injunction against businesses where the litigant claims a company is violating EU (or national) competition law and/or to recover losses the litigant believes it has suffered as a result of the competition law violation.

Further, the EC encourages firms and individual citizens to continue reporting to it any cartels and other antitrust violations, including the abuse of a dominant position. This potentially puts businesses at risk of their competitors exploiting the situation for their own commercial gains.

CONCLUSION

It is important that businesses ensure that their arrangements intended to address the COVID-19 situation are competition law compliant, and that they are documented appropriately in order that they can be properly defended to the EC, national authorities, and/or in private litigation if necessary.

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